The Real Cost of Copper

Very interesting study released last week by SNL Metals Economics Group.

The report looked at costs in the copper industry over the last few decades. And found some startling numbers.

The most interesting figures had to do with costs. The group estimates that over the last 20 years, the average capital cost for copper production capacity has risen on average by 15% per year, with “much of the increase evident since 2008.”

That’s an incredible amount of cost inflation for producers to keep up with. And the problems aren’t just with capital costs.

The group estimates that the average cost to find and produce a pound of copper has risen from $0.76 in 2003 to $3.30 in 2012.

This is a stark reminder that even at $3 copper prices, producers may not be doing as well as investors might suspect. In fact, on an all-in basis, they may even be losing money.

This ties in with another theme of the report: the lack of new copper projects being developed. The group notes that out of 100 significant copper discoveries made between 1998 and 2012, only 15 have reached production.

The lack of mine-builds makes sense if you consider how producers are–generally–staring down a loss after capex and opex.

But yet the world still needs metal. The report estimates that producers globally need to replace about 1.1 billion pounds of copper reserves yearly to keep pace with production.

This is probably why copper producers have been some of the most active in funding exploration projects of late. We’re in an environment where only the best deposits–the highest-grade, lowest-opex–might get built. And if you don’t have the best in inventory, you need to go out and discover it.

Producers have also been looking to brownfields expansions as a (hopefully) lower-cost way of growing reserves and production. But many of these projects are also turning out to be expensive and difficult.

We’re thus at a bit of stand-off right now. Everyone knows they need to build, but no one wants to take the risk.

Maybe a lull in development will bring costs down. Or maybe demand for copper will lift prices to the point where expensive projects can get built.

Trying to bet on this outcome is a tough one. The only thing that seems clear is, if you’re working on a copper project these days, it’d better be high-quality.